1. Week 8- 11.15.04 Pricing Considerations and Strategies

2. Price ?  The amount of money charged for a product or service.  The sum of values consumers exchange for the benefits of the product or service.  Price in the mix, flexibility and problems.

3. Factors Affecting Pricing Decisions Internal factors Marketing objectives Marketing-mix strategy Costs Organizational considerations Internal factors Marketing objectives Marketing-mix strategy Costs Organizational considerations External factors Nature of the market & demand Competition Other environmental factors (economy, resellers, government) External factors Nature of the market & demand Competition Other environmental factors (economy, resellers, government) Pricing decisions Pricing decisions

4. The Experience Curve $2$2 $4 $6 $8 $10 100 000 200 000300 000400 000 Accumulated production Cost per unit

5. % change in Price External Factors Affecting Pricing: Market and Demand  Sets the upper limit of price possibilities  Perceived value determined by perceived benefits (not a product only) versus perceived sacrifice  % change in quantity demand = Elasticity

6. Demand Curves P’2P’2P’2P’2 P’1P’1P’1P’1 Q1Q1Q1Q1 Q2Q2Q2Q2 P1P1P1P1 P2P2P2P2 Q’1Q’1Q’1Q’1 Q’2Q’2Q’2Q’2 Quantity demanded per period A. Inelastic demand Quantity demanded per period B. Elastic demand Price

7. General Pricing Approaches Low price No possible profit at this price High price No possible demand at this price Competitors prices Other internal and External factors Consumer Perceptions Of value Major considerations in setting price Product Costs

8. Cost-Based Pricing  Add a standard markup to cost of the product.  Very popular because of certainty and fairness.  What about markups ?  Evolution to profit pricing: Break-even analysis.

9. Break-Even Chart Dollars (thousands) 6 5 4 3 2 1 0 unit cost Fixed cost Total revenue 10002000300040005000 Sales volume in units Total cost B.E Loss Profit

10. Value-Based Pricing  Pricing developed early as part of overall marketing program  Target price based on perceived value of the extended product  Perceived value dictates design and cost  Value pricing strategies yValue-added - business markets yEveryday low pricing - consumer markets

11. Value versus cost based Pricing Product Cost Price Value Customers Product Cost Price Value Customers Cost-based pricing Value-based pricing

12. Competition-Based Pricing  Consumers use competitors’ price as reference for product’s value  Going Rate Pricing  Firm benchmarks on competitive price  Price differences small and constant  Going price as indirect measure of demand  Sealed-Bid Pricing  Lowest price wins - the winner loses?

13. New Product Pricing Strategies: Market-Skimming Pricing Market-Skimming Pricing  High price just worth- while to some segments  fewer sales  Skim maximum revenue layer by layer  more profit.  Conditions: Image and quality key Production economic for segment size High barriers to entry

14.  Low initial price - win many buyers and large market share quickly  Conditions: Market is price sensitive Scale economies exist Low price an effective market entry barrier New Product Pricing Strategies: Market-Penetration Pricing

15. Product-Mix Pricing Strategies StrategyDescription Product line pricing Optional-product pricing Captive-product pricing Product-bundle pricing Setting price steps between product items Pricing optional or accessory products sold with the main product Pricing products that must be used with the main product Pricing bundles of products sold together

16. Price-Adjustment Strategies StrategyDescription Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Setting prices to reward customer responses such as paying early or promoting the product Adjusting prices to allow for differences in customers, products, or locations Adjusting prices for psychological effect Temporarily reducing prices to increase short-run sales

17. Price Changes: Reasons for Initiating Price Cuts  Excess capacity  Market share falling to competition  Exploit competitive advantage in costs  Anticipate buyer and competitor reactions

18. Price Changes: reasons for initiating price increases  Rising costs and falling profit margins  Demand exceeds ability to produce  What should a company do to justify ? Avoid negative reactions Communicate the reasons

19. Price Changes: Buyer Reactions  Price cut : May be perceived as negative  Price increase : Hot product? Exceptional value? Greedy seller?

20. Price Changes: Competitor Reactions  Reaction likely when: Few competing firms Few product differences Buyers well informed  Reactions never certain: Each competitor may react differently

21. Has competitor cut price? Has competitor cut price? Will lower price negatively affect our market share & profits? ? Will lower price negatively affect our market share & profits? ? Can/should effective action be taken? Can/should effective action be taken? Hold current price; continue to monitor competitor’s price Hold current price; continue to monitor competitor’s price Reduce price Raise perceived quality Raise perceived quality Improve quality & increase price Improve quality & increase price Launch low-price “fighting brand” Launch low-price “fighting brand” Yes No Assessing & Responding to Competitor’s Price Changes Yes